APPLIED ECONOMICS_GRADE 12

UNIT I: INTRODUCTION TO APPLIED ECONOMICS

MODULE 1 (Q1 – W1 to W2)

Learning Competencies:
1. Define basic terms in applied economics
2. Identify the basic economic problems of the country
3. Explain how applied economics can be used to solve economic problems

Topics:
 Revisiting Economics as a social science
 Economics as an applied science
 Basic economic problems and the Philippine socio-economic development in the 21st
century

PART 2

Basic economic problems and the Philippine socio-economic development in the 21st
century

Figure 1.3. Basic Economic Problems Diagram

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Figure 1.4. Economic Resources Illustration

All societies are forced with basic questions in the economy that have to be
answered in order to cope with constraints and limitations and these are:

1. What to produce and how much?

The society decides what goods and services should be produced in the
economy. Having decided on the nature of goods that will be produced, the
quantity of these goods should also be decided on. Factors to consider are the
availability of resources, physical environment, and customs and traditions of
people.

2. How to produce?
It is a question on the production method that will be used to produce the
goods and services. This refers to the resource mic and technology that will be
applied in the production. The system must select the proper combination of
economic resources in producing the right amount of output. The quality of output
must come first before the quantity.

3. For whom to produce?

It is about the market for the goods. For whom will the goods and services
be produced? The young or the old, the male or the female markets, the low-
income or the high-income groups. This has something to do with distribution.
Once the goods are produced, how shall they be distributed?

This basic economic question is focused on who receives what share of

the products and services which the economy produces. The portion of production
which each person and family can consume is determined by their income.
Income is distributed in line with the value of resources we have to sell.

How these questions are answered depends on the nature of the economic system
is the means by which society answers the basic economic programs. A country may
be under any of the following types or even combination of the following economic
systems:

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1. Traditional Economy.
Decisions are based on traditions and practices upheld over the years and
passed on from generation to generation. Methods are stagnant and therefore not
progressive. Traditional societies exist in primitive and backward civilizations.

A traditional economic system focuses exclusively on goods and services

that are directly related to its beliefs, customs, and traditions. It relies heavily on
individuals and doesn’t usually show a significant degree of specialization and
division of labor. In other words, traditional economic systems are the most basic
and ancient type of economies.

2. Command Economy. This is the authoritative system wherein decision-making

is centralized in the government or a planning committee. Decisions are imposed
on the people who do not have a say what goods are to be produced. This
economy holds true in dictatorial, socialist, and communist nations.

A command economic system is characterized by a dominant centralized

power (usually the government) that controls a large part of all economic activity.
This type of economy is most commonly found in communist countries. It is
sometimes also referred to as a planned economic system, because most
production decisons are made by the government (i.e. planned) and there is no
free market at play.

3. Market Economy.
This is the most democratic form of economic system. Based on the
workings of demand and supply, decisions are made on what goods and services
to produce. People’s preference is reflected in the prices they are willing to pay in
the market and are therefore the basis of the producers’ decisions what goods to
produce.

A market economic system relies on free markets and does not allow any
kind of government involvement in the economy. In this system, the government
does not control any resources or other relevant economic segments. Instead, the
entire system is regulated by the people and the law of supply and demand.

Some other economic problems are:

 Are the country’s resources being utilized or some of them are lying idle and
unemployed? When resources are scarce, it is absolutely not right to keep some
of the available ones idle. If the resources are not fully utilized, the production
system is said to be inefficient.
 Is the economy’s capacity to produce foods growing or remaining the same
over time? To achieve growth on productive capacity is a universal objective.

In the Philippine context, the following are the basic economic problems:
 Non-inclusive growth despite of economic growth. Millions of Filipinos are
claiming they are experiencing hunger or they still live below the poverty line.
 Unemployment despite improvement.
 Poverty
 Population growth

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APPLIED ECONOMICS IN RELATION TO THE PHILIPPINE ECONOMIC

PROBLEMS
A solid understanding of economic principles and how they are applied in real-life
situations can serve as significant tools to help address the country’s economic problem. For
example, understanding the existence of scarcity can help economics students analyze how to
maximize the use of available resources in order to overcome scarcity. Knowledge of economic
theories such as the Law of Supply and Demand can help in analyzing why prices are high and
what the government can do to help bring down prices.

THE PHILIPPINES’ BASIC ECONOMIC PROBLEMS

 Poverty
 Population Growth
 Unemployment despite improvement
 Non-inclusive growth despite of economic growth

SO WHY IS THE STUDY OF ECONOMICS IMPORTANT?

 The most important news are economics in nature.
 Economics will help the students understand why there is a need for everybody, including
the government, to budget and properly allocate the use of whatever resource are
available. It will help them understand how to be more rational in decisions involving
spending money, saving part of it, and even investing some of it.
 Understanding the existence of scarcity can help economics students analyze how to
maximize the use of available resources in order to overcome scarcity. The knowledge on
economic theories such as the law of supply and demand can help in analyzing why
prices are high and what the government can do to help bring down prices.
 On the national level, economics will enable the students to take a look on how the
economy operates and to decide for themselves if the government officials and leaders
are trying to shape up the economy and formulate policies for the good of the nation.

Scientific Approach in the empirical testing of an economic theory

Economics is a study that attempts to explain how an economy operates and how the
consumer attempts to maximize his wants within limited means, using tools such as logic,
mathematics, and statistics, the students need to approach the empirical testing of an economic
theory in a scientific manner. This scientific approach involves the following steps:
1. State the proposition or conditions that are taken as given and no need for further
investigation, as basic starting point of investigation. These propositions will serve as the
premises upon which theory is established.
2. Observe facts in connection with the activity that we want to theorize.
3. Apply the rules of logic to the observed facts to determine casual relationships between
factors and to eliminate those which are unnecessary and irrelevant.
4. Establish a set of principles such that formulated hypothesis may be tested as to whether
they are valid or not.
5. Use statistics and econometrics as empirical proof in testing the hypothesis.

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Positive Economics vs. Normative Economics

Positive Economics deals with “what is” or things that are actually happening such as the
current inflation rate, the number of employed labor, and the level of the Gross National Product.
Normative Economics, on the other hand, refers to what “should be” – that which embodies the
ideal rate of population growth or the most effective tax system. Positive economics is an
overview of what is happening in the economy that is possibly far from what is ideal. Normative
Economics focuses on policy formulation that will help to attain the ideal situation.

MEASURING THE ECONOMY

The heart of economy is production whose value measures both resource input and output
of people. The interplay of resources and outputs tells how well the economy has performed.

GNP vs. GDP

GNP or Gross National Product. It is the market value of final products, both sold and unsold,
produced by the resources of the economy given in a period.
o Market value is determined by supply and demand by supply and demand.
o Economy’s resources are those belonging to Filipino citizens and corporations.
o NOT ALL RESOURCES BELONGING TO THE ECONOMY ARE IN THE
ECONOMY.
o CONVERSELY, NOT ALL RESOURCES IN THE ECONOMY BELONG TO THE
ECONOMY.
Figure 1.5. Gross National Product

GDP or Gross Domestic Product. It is the better indicator of domestic employment

opportunities. It is defined as the market value of final products produced within the country.
o It is the net of GNP after deducting NET FACTOR INCOME from abroad or by
deducting factor income from broad and adding back FACTOR PAYMENTS to other
countries.
o NET INCOME from abroad or by deducting factor income from abroad and adding back
FACTOR PAYMENTS to other countries.
o NET FACTOR INCOME from abroad is net export of factor service equal to Factor
income from abroad less the factor payments of other countries.
Net Inflow = Inflow – Outflow
-Net Inflow = -Inflow + Outflow

NATURAL RESOURCES

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We often hear or learn in economic discourses that the major social problems may be
rooted in the phenomena of scarcity and shortage. We import rice, for instance, because of
inadequate supply. We intensify our export policies because our country still does not earn
enough from the export of its products to other countries. Prices of petroleum products will
increase because oil production is low. At a glance, we may say that scarcity and shortage are
indeed the roots of our problems. But is this really the issue?
The Philippines is rich in natural resources. Look at our forest, mountains and seas.
Doesn’t it make us proud to have an abundant environment? Isn’t it that Filipinos are also
naturally creative and resourceful? If so, why then do many of us still live in extreme poverty?
Why are there so many hungry and homeless Filipinos?
We will now take a closer look at the country’s natural resources. Likewise, we will
discuss the state of these resources. We will also try to delve deeper into such issues as the use,
control and ownership of these resources.

Resource
Any object, living or non-living, becomes a resource once people discover its use. This
means that anything or substance can only be considered a resource if it fulfils a human need.
For instance, the wild grass known as “pansit – pansitan” found in our backyards was
discovered to be an effective remedy for various ailments. Nata de coco, was only valued before
as food until it was discovered useful in the manufacture of electronic products.
It is important for us to realize that the possibilities fro having and discovering new
resources are endless. The need to survive compels people to find new and different ways and
uses for things they see around them. This statement disputes earlier assumptions that scarcity of
resources is the root of our social problems.

Philippines, an Abundant Country

The Philippine is part of the Asian continent. It is an archipelago composed of almost 7,
107 large and small islands. Our country is bounded in the east by the Pacific Ocean, South
China Sea in the west, the Babuyan Channel in the north and the Celebes Sea in the south.
The Philippines has a land area of roughly 30, 000, 000 hectares occupying around 0.2%
of the world’s total land area. It has coastline measuring 17, 460 kilometers said to be longer
than that of the United States. Because of the country’s beautiful location, it has earned the labels
“Gateway to Asia”, “Pearl of the Orient”, and others.
 Forest
 Mineral Resources
 Gold
 Copper
 Chromite
 Nickel
 Iron
 Manganese
 Water Resources
 Human Resources

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